As part of the recent tax deal, President Obama has proposed a 2% reduction of the Social Security payroll tax. With this change, a worker making $50,000 in wages would bring home about $1,000 extra over a year. But this also means smaller revenues for the Social Security Administration.
Employees currently pay 6.2% of wages in Social Security tax, a contribution matched by their employers. The 6.2% paid by employers would remain unchanged. After all is said and done, the government will likely borrow $112 billion to fund the retirement and disability entitlement program this year.
Social Security’s Long-Term Outlook
Many say that this measure will be good for the economy. The dollars saved will be spent in local economies, spurring local business and job growth. Most economists and politicians agree that raising taxes during this deep of a recession would be risky business indeed. Others note that because the funds will be made up with borrowed dollars, the plan doesn’t do anything notable to Social Security’s long-term solvency. But how does that long-term outlook look right now?
Since the 1980’s, Social Security has amassed a trust fund in the amount of $2.5 trillion dollars. However, the government has borrowed that money to pay for other programs, issuing special Treasury bonds guaranteeing that the money will be repaid with interest.
Social Security is coming under fiscal pressure as increasing numbers of Baby Boomers begin to retire. Because the largest generation will be receiving Social Security benefits, and because the next largest generation is made up of young people who have yet to command high salaries, Social Security will pay out more in benefits than it takes in from payroll taxes for the first time since the 1980s.
According to the most recent Social Security Administration trustees’ report, the trust’s funds will be depleted by 2037 if no changes are made to the program’s financial structure.
How this will affect young people currently in the beginning of their careers remains to be seen. The leaders of the recent bipartisan deficit reduction commission suggested raising the full retirement age from 67 to 69, for example.
Others have suggested adding means testing to Social Security. This would mean applying some measurement of retirement income or wealth to see whether or not a retired person required the added income of Social Security. Or, it could mean paying higher payroll taxes for Social Security once the Great Recession turns around and the economy can withstand the pressure of slightly higher taxation.
To sum up, Echo Boomers might find that they have to pay a bit more in Social Security taxes, wait a little longer to get their benefits, and may find they get a smaller amount if they can get by without a larger payout.
One thing is for certain, how much you can rely on Social Security during your retirement is entirely uncertain. The only way to mitigate that risk is to save from day one. Start by fully funding your Individual Retirement Account, 401(k), or 403(b). Dollars banked during your twenties can compound to thousands by the time you retire. And since we can’t tell how much twenty-somethings will be able to rely on Uncle Sam, it’s best to rely on yourself.